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June 21, 2007

The Downside of African Aid

After three deep dives in Africa, there is an issue that is quickly becoming the elephant in the room: the negative impact of aid in Africa. Rather than tiptoe around this thing for the next three months, it's probably better to get the discussion going early and often. We'll just have to see where it takes us.

It comes down to this basic question: Do handouts, both financial and otherwise, do more harm than good in Africa's struggle to break the cycle of disease, famine, and poverty. It is an explosive issue to say the least, and there are many impassioned voices on both sides of the debate. Advocates of aid believe that the billions that have been poured into Sub-Saharan Africa over the past three decades have been effective, if not sufficient. Opponents believe that delivering money, food, or medicine without strings attached breeds nothing more than dependency.

Though it's early, and we certainly plan to explore this topic in great depth over the coming months, the early indications are that within Africa there is a growing backlash against the international aid community. At first I thought this sentiment was strongest among the entrepreneurial participants in the Global Innovation Outlook. After all, if anyone would see the benefits of bootstrapping, it was these small business owners and investors. But when I looked closer at the transcripts from our meetings, I noticed that the strongest comments came from those you would least expect: government leaders and sometimes NGOs themselves.

"No nation has ever grown strong by accepting handouts," said one prominent government official. And these thoughts were echoed throughout the Nairobi and Dakar deep dives. There was the unmistakable sense that years of charity, and billions in aid, have not worked. The time has come for Africa to create its own wealth. We have heard this over and over again in our meetings. It's the classic teach-a-man-to-fish scenario. But it goes beyond that even. Some participants were concerned that NGOs attract valuable local talent that could be starting successful businesses in their home towns, employing hundreds of fellow Africans, rather than working with charitable outfits.

And we're not the only ones hearing it. In this New York Times column by Jason Pontin, the editor-in-chief MIT's Technology Review, the same issue is explored from the perspective of participants in the TEDGlobal 2007 conference held this month in Tanzania. In Pontin's account, the choice is between technology or aid. But we've been hearing a broader debate: entrepreneurship or aid.

Pontin rightly concludes that the choices are not mutually exclusive. And that aid will continue to play a critical role in the economic development of Africa. But some of our participants had wonderful ideas for how to put those billions in international aid to better use, and bridge the gap between aid and entrepreneurship. For example: why not use aid to fund small and medium business loans, something that is sorely need in Africa. They might even make a good return on their investment, and will help create jobs and economic growth by funding the gap between microfinance and commercial lending, something we've been calling the "mesofinance gap."

There are other ideas to be sure. And we welcome any impromptu brainstorming you'd like to do on the topic. We'll be sure to bring it up in Europe, Asia, and the U.S. to get the outsider perspective.

June 21, 2007 in Africa | Permalink | Comments (1) | TrackBack

June 15, 2007

The Mobile Imperative

Because of its unique geography (which is vast) and its lack of fixed wire telecommunications infrastructure, many experts think that Africa is in prime position to leapfrog over landlines and become a leader in wireless. What most experts don’t know, however, is that Africa has already done it.

In Kenya, the GIO bore witness to the first killer application for mobiles in rural areas. Safaricom, Kenya’s leading wireless provider (and a ubiquitous presence throughout the country), recently launched a mobile money transfer service called M-Pesa. By sending a simple text message, Safaricom subscribers can send money to friends, family, and business acquaintances. The money is then stored in a virtual account until the recipient cashes it in at a local Safaricom office.

So what does it mean? For one thing, it revolutionizes banking for developing areas. Traditional banks have historically ignored the rural poor. In fact, 38 percent of Kenyans do not even have access to banking facilities. They are called “the unbanked.” But well over half the population either owns or has access to a mobile phone. In the past, Kenyans would send money through the mail, Western Union, or more informal means. But those money transfer systems were expensive (sometimes as much as 10 percent of the transaction) or lacked security. M-Pesa costs about $2.50 per transaction, and can transfer as much as $525 at a time. And subscribers are required to enter a password to transfer or access received funds.

This means that the cost of doing business in these areas is reduced. It also brings some of the aforementioned informal economy into a more structured, formalized world. Kenyans are signing up for the service at a rate of 1,000 per day. And it’s not hard to imagine the next steps for a service like this: digital wallets, in which the mobile phone becomes a means of payment not just between individuals, but also between local merchants. It’s a vision the developed world has been talking about for decades. And Africa is leapfrogging the world to get there first.

It all arises from Africa’s socio-economic makeup and geography. Remarkably, the infrastructure is already in place. Even in the most remote areas, like a Masai village on the Western boarder between Kenya and Tanzania, the wireless signal is strong and true. And mobile money transfer was already happening, as Africans bartered with their mobile phone minutes on pre-paid calling plans, as a form of makeshift mobile currency. Safaricom just formalized it.

There were a few topics that we fully expected to be a focus of attention in our Africa dives. And the role of mobile phones and networks was one of them. Our deep dive participants have not disappointed. Not twenty minutes into our student deep dive last week in Nairobi, an idea that came out of our last focus area, media and content, resurfaced. A lecturer from the University of Nairobi reiterated the power of mobile phones for integrating the rural poor into the broader economy. He even articulated the need for some kind of language service to address the issue of illiteracy. It was like déjà vu all over again, the exact idea a participant surfaced in our Mumbai dive on media and content. And the discussion of the power of the mobile platform has not let up since.

But some people, mostly cynics, have questioned the usefulness of mobile services for rural villages. We’ve heard a lot of questions about what kind of applications these people would use. On some level, we’ve been taking it on faith that, if given a powerful mobile platform, rural people would develop their own uses, some of which we can’t yet conceive. Mobile money transfer is a perfect example.

Pretty amazing stuff. Innovative, ground-breaking, totally cutting edge stuff. And 100 percent African. Safaricom is already working to extend the service internationally through its close ties to Vodafone. What other applications would be available on this platform? I encourage you to speculate on this blog. Send me comments and we’ll probe them further throughout the Africa deep dives around the world.

June 15, 2007 in Africa | Permalink | Comments (7) | TrackBack

June 12, 2007

The Missing Middle

Reading some of the popular press, you might think that Africa is awash in capital. After all, there are countless success stories about microfinance, the small loans that help individuals start businesses in their local communities. Charitable organizations continue to donate huge sums. And we’ve all read that China is pouring money into Africa in an attempt to line up natural resources for decades to come. But, as we learned in our third Global Innovation Outlook deep dive in Dakar, Senegal, there is something missing from these stories: the middle.

While there is money available to individuals and big businesses, there is very little money available to small- and medium-sized businesses. And this lack of financing for SMBs, the so-called “mesofinance gap,” is holding back the real engines of economic growth for Africa’s developing regions, and has been troubling a number of our deep dive participants.

In Dakar, our participants were in total agreement about the nature of the problem, if not the solution to it. We had participants from Nigeria, Cote d’Ivoire, Senegal, Uganda and South Africa, representing a diverse array of organizations, including Compagnie Sucriere Senegalese (Senegal Sugar Company), Telnet Nigeria (largest telecom in Nigeria), NEPAD (New Partnership for Africa’s Development), the Association of African Universities, Manobi (a mobile data services provider), and Gate7 New Media (mobile new media company in South Africa). We even had South Africa’s ambassador to Senegal, Thembi Majola-Embalo.

But perhaps no one was more suited to address the mesofinance problem than David Beguma, the executive director of the Association of Microfinance Institutions of Ugandua (AMFIU). David’s job is guide the burgeoning microfinance industry in Uganda, and AMFIU includes more than 80 full-time members. He recognizes that the problem stems from microfinance institutions not having enough money to loan to SMBs, and commercial banks not having the appetite to risk capital on small businesses without much collateral. And even if a bank takes a chance on an SMB, the laws of most countries make it nearly impossible for the lender to recoup its investment through legal means. One participant estimated that 12 of 13 cases where a lender takes someone to court because of defaulting, the claimant loses.

But David has a two-pronged approach to trying to close the mesofinance gap:


David feels strongly that microfinance institutions need to start looking at their investments as more long term, allowing their clients a chance to grow into the SMBs that African nations so desperately need to employ people. But there are other ways to close the mesofinance gap as well. One participant was very big on vendor financing, the practice of suppliers loaning money to customers so those customers can purchase needed equipment to jump start their business.

And Thembi recommended that governments use their buying power to force big companies to take on local subcontractors, bridging the gap between small and big, and transferring much needed skills in the mean time.

However it gets addressed, it’s clear the mesofinance gap needs to be bridged, and fast. Small and medium businesses do more than just grow wealth and provide jobs. They are engines of innovation. And Africa needs them.

June 12, 2007 in Africa | Permalink | Comments (1) | TrackBack

June 08, 2007

The Upside of Informal Economies

Another day, another deep dive, another stunning education on the issues facing modern day Africa. Yesterday’s meeting in Nairobi differed from the previous day’s meeting in makeup and subject matter, but the eye-opening, revelatory nature of the discussion was just the same.

“We just don’t get a chance to get together with people from all these different backgrounds within Africa,” said one deep dive participant, referring to the deep dive that included representatives of major African universities like Makerere and the National University of Rwanda, government offices like the Kenyan Ministry of Information and Communication the Ugandan National Planning Authority, financing companies like JPMorgan Chase, K-Rep Development Agency (microfinance) and the African Venture Capital Association, major multinational corporations like The Coca-Cola Company, and a host of non-governmental organizations and non-profit groups. “So it’s amazing when we all start talking and realize we’re thinking the same things.”

And one of the things that everyone in the room is thinking about is the role informal economies of African countries can and should play in the economic development of the continent. An informal economy is loosely defined as business that takes place outside of government regulation, taxation, and other formalized rules of law.

This phenomenon is not unique to Africa, of course. In the states we call it “off the books” business or “under the table.” But in Africa the informal economy is bigger. Much bigger. Some of our deep dive participants estimated that somewhere between 40 percent and 90 percent of employment is through informal channels, depending on which country you are talking about. And these businesses constitute more than half of the GDP in many countries.

The existence of informal economies is not inherently a bad thing. In fact, many in the room saw these businesses as emblematic of Africa’s burgeoning entrepreneurial spirit. And it serves as a means to put food on the table for millions of Africans.

The problem is that these businesses have trouble growing, employing more people, and creating more wealth, because they have to continue to operate under the radar of regulatory bodies. They also have no access to financing, or the basic business training and skills that could help them improve the business.

“Imagine if these people had access to more information, so they can learn how to make their businesses bigger,” said Kelvin Balogun, a business strategy director at The Coca-Cola Company. “If it were possible for these people to interact, through some kind of platform, it could move them to a higher level of empowerment.”

Kelvin did an incredible job of articulating the nature of these informal economies, the challenges facing them, and some possible methods to enable them to grow, and perhaps make the jump into the formal economy. I implore you to listen to his words, not mine.

Kelvin believes the young and creative minds that make up these informal economies are the key to Africa’s economic growth, and it’s hard to argue with him. He shared examples of sophisticated electronics manufacturers, used car parts franchises, and other businesses that operated completely off the books. And though he poses a lot of questions in the above video, he has more answers than you might think.

For example, and at the risk of burying the lead, there was a strong sentiment in the room about the role of non-governmental organizations (NGOs) in Africa. Many felt that NGOs and other aid organizations are doing more harm than good, in that they do not empower business owners or encourage entrepreneurship. In fact, they undermine these important goals more often than not. This is a subject that we will want to explore at much greater length throughout this GIO.

I tell you this because Kelvin had an amazing idea for how to use aid organizations more effectively in Africa. He suggested that if a large charity of foundation created a pool of funds that targeted informal businesses, offered financing to them, business skills training, and even funding to help them grow and transition into the formal economy, the money would be better spent than on handouts. They might even make a return on their investment by mistake.

That’s just one of the really compelling ideas that came out of this dive. Over the course of the next two weeks, we’ll try to space them out. So be sure to come back and see what else we learned in Nairobi. Or better yet, sign up for the RSS feed.

June 8, 2007 | Permalink | Comments (3) | TrackBack

June 06, 2007

Collaborate, Collaborate, Collaborate

Towards the end of our first deep dive on the Africa focus area, a session that included 15 university students from all over the continent (including Uganda, Ethiopia, South Africa, Kenya, Tanzania), it was a young man from right here in Nairobi that sent a strong and direct message to the business leaders, government officials and academics that will constitute the future GIO deep dives: “Collaborate, collaborate, collaborate.”

This simple request came from Athman Fadhili, an MBA student from the University of Nairobi, who had spent a large portion of the day imploring the private sector to take a more active role in the development of curriculum at African universities. And he was not alone in his desire to see this kind of public and private collaboration. In a day-long, wide-ranging conversation that focused heavily on the overburdened African university system, many expressed the need for increased involvement from the businesses that will one day employ these students. But no one said it any better than Athman. So I’ll let him tell you what he wants, and how he thinks it can get done.

In general, there seemed to be a high level of frustration and discontent with  government ability to steer the university system (and a few other major infrastructure challenges). And no one in that room underestimated that system’s role in fostering a culture of entrepreneurship. So the students were clearly reaching out to the private sector for help. Help in influencing the government to overhaul curricula; help in creating internships to give students more real world experience; help fostering students and the ideas through mentoring programs.

“The private sector is known for its ability to implement and sustain ideas,” said Kevit Desai, the ICT Governor of the Kenya Private Sector Association (KEPSA), an industry group. “But it’s important that they do things the right way.”

And there is at least one example of the right way. At Cida City Campus, a university in South Africa that caters to students from poor backgrounds, there is an entire school for entrepreneurs. Richard Branson, founder of the Virgin conglomerate, donated the school (called the Branson School of Enterpreneurship), and even set up a seed fund to get students the capital they need to launch their businesses.

The Branson School is more of a purely philanthropic endeavor. But what Athman is calling for is large corporations that have the funds and long-term vision to create centers of learning in African schools in exchange for qualified, trained employees. It seems as though more of them would be willing to do it if the government loosened up its controls.

In other news from today’s dive, we did an interesting exercise with the students. The tendency in meetings like this is to dwell on problems. But today we asked the students to think of things that have gone right in Africa, examples of entrepreneurship and innovation that can serve to inspire. And the list was too long to publish in just one blog.

But the highlights included: a mobile service from Kenya wireless provider Safaricom, called M-Pesa, that allows subscribers to maintain bank accounts on their phones, and transfer money to other Safaricom subscribers; a Ugandan Health Information Network that uses low-cost handhelds to transmit continuing medical education information to doctors in remote areas; and a couple of entrepreneurs in Kenya that fashioned sandals from used tire treads and sold them for $100 a pair.   

A student dive was a great way to kick off the Africa focus area, as we will now take the perspectives of the youth of Africa to the business, government, and academic leaders of the world. And if this dive was any indication, the order of the day is going to be: collaborate.

June 6, 2007 in Africa | Permalink | Comments (4) | TrackBack

June 04, 2007

Into Africa

Wow, this is huge.

The Global Innovation Outlook focus on Africa represents the most ambitious and challenging topic we’ve undertaken since the program began three years ago.  Previous focus areas have been grand in scale and complex to tackle, to be sure: transportation, the environment, healthcare. But Africa seems different in so many ways.

For one thing, it’s big. Really big. Continentally big. There are 54 countries in Africa, and just under a billion people. You could fit the United States, China, and Europe inside of Africa’s geographical borders and still have room for most of Central America. You could spend a lifetime just studying its various regions, climates, and cultures. In fact, some of our deep dive participants will have done just that.

That size and diversity actually means any discussion of Africa is really a discussion of multiple Africas.  There are the Mediterranean states which have long traded with nearby partners in Europe.  The strong Middle Eastern culture of Egypt and surrounding countries.  The resource-rich but very different worlds embodied by the sub-Saharan regions on the continent’s east and west coasts.  And South Africa with its long legacy of trade enabled by its unique geographic positioning.

But the thing that is driving  IBM’s interest in exploring this topic is the fact that Africa is poised to take a greater role in shaping the global economy over the next decade. Sure, Africa has always participated in the global economy. It has been mined for resources, mostly by foreigners, of all kinds since the beginnings of global commerce. But only recently has the world begun to see the potential for Africa to participate in global business on its own terms. And between the continent’s burgeoning trade with China (growing at 40 percent a year), its steadily growing economy (above 5 percent), and some much needed political stability, there is an undeniable sense that Africa is finally positioned to develop its own economic prowess.

To lay down some foundation for the discussions we’ll be having in Africa, and because it is such an enormous topic with countless moving parts, IBM has cultivated a powerful network of experts to help shape the agenda for the next three month’s discussion.  Makerere University in Uganda (argurably the most prestigious and successful of African universities), Reuters (also a GIO Media & Content partner), and NEPAD (New Partnership for Africa’s Development) are all working alongside IBM to ensure that the upcoming deep dives in seven different cities – Nairobi, Dakar, Paris, Lisbon, Atlanta Beijing, and Cape Town -- are as productive as possible.

In addition, IBM conducted something called a “ThinkPlace Challenge,” a kind of online brainstorming session, to surface ideas that we’ll want to pursue further in Africa. IBM has been using ThinkPlace internally for years, but this is the first time the forum has been opened up to participants outside the company. Already, we’ve seen some compelling ideas that warrant further discussion.  For example, one participant suggested that the GIO explore the “mesofinance gap.” This is the gray area between microfinance (very small loans given mostly to individuals) and typical corporate financing (for larger, more established companies.) Africa needs loan programs that target the small and medium businesses that will power regional economic development.

This is just one of many ideas we’ll be kicking around during the Africa deep dives. Other topics that we’ll be exploring will be infrastructure (mostly energy and telecommunications), investment partnerships (like unique public/private collaborations), and, perhaps most important, how Africa can develop its own areas of innovation expertise that can be leveraged throughout the world.

Like I said, this is big stuff.  We’ve got a lot to learn, and expect that the rich mix of perspective from within Africa and from around the world will unearth new ideas and approaches to innovation that have not yet been considered.  As we learn, you’ll learn too.  Check back with the GIO blog over the next two weeks as things kick off in Nairobi and then Dakar.

June 4, 2007 in Africa | Permalink | Comments (1) | TrackBack